"European synthetic ETFs are themselves subdivided into two categories, using unfunded and funded swaps. Neither name is immediately helpful to the non-specialist.

In an unfunded swap structure, the ETF acquires a basket of stocks or other assets, which usually have little in common with the index being tracked.

As the same time, the ETF also enters into two-legged total return swap with a counterparty. In other words, the two parties to the swap exchange the returns they are receiving. In one leg, the ETF contracts to pay the return on the basket to the counterparty. In the other leg, the counterparty pays the return on the index to the fund.

In a funded swap structure, the ETF makes a payment to the swap counterparty, who agrees to pay the index return. The counterparty also pledges collateral to the ETF’s custodian, covering the fund’s net asset value.

A distinction between the unfunded and funded swap structures is that in the unfunded swap structure, the ETF owns the basket of assets whereas, in the funded swap structure, the ETF does not have direct ownership of assets, but has a claim on collateral that has been pledged by the counterparty."

"A flurry of headlines related to recent lawsuits filed against major asset managers has once again put a spotlight on securities lending. These recent lawsuits have highlighted fee-sharing arrangements associated with securities lending and brought to the surface again the losses incurred by some investors due to securities-lending collateral reinvestment practices."